| Contra accounts are separate accounts reported on the balance sheet that reduce or increase the value of the main asset or liability account. |
The account listed with the main asset account is called a contra asset account. Similarly, the account listed with the main liability account is called a contra liability account. The contra account is not an asset or liability in itself, but an account used to adjust the carrying amount of the related asset or liability account.
The word contra means contrariwise; or on or to the contrary. Since asset accounts are debit accounts, a contra asset account is a credit account used to offset the balance of the main debit account.
Examples of Contra Accounts
Examples of contra asset accounts are accumulated depreciation, used to report fixed assets at the book value (original cost – depreciation), and allowance for doubtful accounts, used to report the accounts receivable asset with the adjustment for bad debt estimates. Allowance for doubtful accounts is thus used to report accounts receivable at the net realizable value, or the amount of cash the company expects to receive for the asset. The balance sheet for Sunny Sunglasses Shop shows the following contra asset account reported with accounts receivable:
Contra Asset Account: Allowance for Doubtful Accounts
| Accounts Receivable | 21,900 |
| Allowance for doubtful accounts | (700) |
| Receivables, net | 21,200 |
Examples of contra liability accounts are discounts to notes and bonds payable, and the short-term portion of long-term debt. Since a note or bond payable is a liability and a credit account, the contra liability account for the main account is a debit account used to offset the balance of its related liability account. The balance sheet for Sunny Sunglasses Shop shows the following contra liability account reported with the mortgage payable:
Contra Liability Account: Short-term portion of mortgage payable
| Mortgage Payable | 18,000 |
| Short-term portion due | (900) |
| Mortgage Payable, long-term | 17,100 |
In this case the $900 is a real short-term liability reported separately on the sample balance sheet as a current portion of long-term debt coming due. The adjustment to long-term debt, on the other hand, is a contra liability account to mortgage payable that merely reduces the mortgage payable and long-term debt.
Contra accounts are also called valuation allowances because they are used to adjust the carrying value of the related asset or liability.
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